The Abolition of Money

Some people believe that money is the root of all evil. At least to the government of India it is the root of all corruption and tax evasion and consequently it is doing everything in his power to withdraw cash from circulation. "On Nov. 8, the Indian government announced an immediate ban on two major bills that account for the vast majority of all currency in circulation. Indians would have until the end of the year to change those notes for other bills, including newly minted ones" reported the New York Times. All that will be left is small change.

Ramesh Thakur a professor at the Australian National University explained in the Japan Times what the new policy was supposed to do and why it won't work.

The goal is to eradicate black money, counter tax evasion and destroy counterfeit currency. In most large economies, cash is around 5 percent of GDP; in India it is 12 to 14 percent. Fewer than one-third of Indians have access to financial institutions. While most banks are concentrated in cities, most Indians live in villages. Forcing businesses to use banks and digital payments will help to bring them inside the tax net.

Only 5 percent of Indian workers pay income tax, just 15 percent of the economy is inside the tax net and India’s tax to GDP ratio at 17 percent is 5 points lower than comparable countries. Because of high property taxes, for example, buyers collude with sellers to understate the sale value and split the tax difference. This explains why the policy is an attack on the Indian way of doing business: Much of India’s cash-based consumer transactions have ground to a halt. ...

The move also confuses the black with the informal economy by conflating cash with black money. Demonetization has the potential to permanently damage the latter, which comprises 45 percent of GDP and 80 percent of the workforce. Its main motor is the desire to escape the crushing burden of state taxes, regulations and bureaucracy. India’s formal and informal economies are not quarantined from each other, but form a seamless value chain. For example, almost one-third of the working capital of small businesses comes from the black economy. Can that lost capital be replenished with fresh credit?

Cash filled a real need in India. Not surprisingly some Indians have turned to substitute currencies to make up for the lost Indian money. The use of Bitcoin is reported to be surging for those who can use it. According to another New York Times article others are shifting to Euros or US dollars.

When governments destroy their currency the population obtains another. Governments can destroy their paper currency in one of two ways. They can do so deliberately, by withdrawing it from circulation, as India appears to be trying to do. Or they can debase it as is the case of Venezuela. The Washington Post reports that the Venezuelan Bolivar is now so worthless that it requires cartloads of money to buy food in the supermarket.

It’s not so easy to find someone who still uses a wallet in Venezuela, where inflation is expected to reach 720 percent this year and the biggest bill — 100 bolivars — is worth about 5 U.S. cents on the black market....

So Venezuelans must handle huge volumes of cash — so much that the bills don’t always fit in a standard wallet — with many people packing wads of currency in handbags, money belts or backpacks.

The owner of a tiny kiosk selling newspapers, cigarettes and snacks in one of Caracas’s nicer neighborhoods said that each evening he quietly stuffs a plastic bag full of the day’s earnings, around 100,000 bolivars (about $52) in notes of 10, 20, 50 and 100 bolivars. This is a country with one of the highest crime rates in the world, and carrying that much cash is dangerous. He said he doesn’t feel safe, despite having his own scooter rather than using public transport.

Under those conditions people will resort to barter or other currencies. Given enough time Venezuela is bound to follow in the footsteps of those widely admired anti-American countries, of which Cuba is one, where the only widely accepted money is the Yankee Dollar. Eventually Zimbabwean hyperinflation became so bad that Mugabe simply lost the power to print currency. The entire country shifted over to the US dollar when the exchange rate reached 35 quadrillion to 1 US dollar. The Mugabe regime has restarted the printing presses after a momentary relief with a new paper bill called the "bond" issued at par value to the US dollar but no one expects it to last.

Many ordinary people fear the new “bond notes”, issued on Monday by the central bank in Zimbabwe, will trigger economic chaos, wiping out savings and causing massive hardship for millions.

Zimbabwe has been ruled by Robert Mugabe, 92, since 1980. Some observers have called the bond notes the autocratic president’s “last gamble”.

The central bank says bond notes will ease crippling shortages of currency, but there are fears their introduction could encourage rampant printing of cash, as happened in 2008.

Only the introduction of the dollar as the official currency in 2009 halted an economic meltdown.

As Tim Worstall of Forbes points out Mugabe's money is less currency and more counterfeit. The quantities it is printed in and the lack of any backing for the notes proves it doesn't have any legitimate claim to being legal tender at all. Mugabe's new money is issued in such pitifully small quantities and set at such a convenient exchange rate to the US dollar (1:1) that it seems designed to piggyback off foreign bills rather than express any economic meaning.

Now, of course, these new bond notes aren’t the only currency circulating. People are using Rand, Dollars, Yen we’re told as well. But still–that a new currency is being issued but only in the sort of volumes that would support a small English country town for a whole country (no, really, there’s about £1,000 in cash per UK inhabitant from the numbers above so, $10 million is £7 million or so is enough to a town of 7,000 people) shows just how appallingly Mugabe has gutted the Zimbabwean economy.

It is no accident that German printers refused to have anything to do with them. "A German company which specializes in the printing of banknotes, Giesecke and Devrient, has rejected Zimbabwe’s request to print bond notes for the cash-strapped Treasury, prompting the desperate government to turn to neighbouring South Africa and other countries for help."